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The government accepting Kirit Parikh committee recommendations is likely to bring down prices of compressed natural gas (CNG) used in vehicles and piped natural gas (PNG) used by households.
Analysts said the revised pricing will benefit city gas distribution (CGD) companies, but upstream firms could see a cut in their margins initially.
The government on Thursday approved the revised domestic natural gas pricing guidelines for gas produced from nomination fields of state-run ONGC and OIL, New Exploration Licensing Policy (NELP) blocks and pre-NELP blocks.
Previously, the price of gas produced from fields covered under the Administered Price Mechanism (APM) regime, which accounts for 70 per cent of domestic gas production, was determined semi-annually based on a formula that benchmarks it to average international prices at four gas trading hubs.
Under this, gas is provided to city gas distributors for supply to CNG and residential PNG segments, which together account for 60 per cent of their sales volume.
End consumers to benefit
According to government’s estimate, CNG prices in Mumbai can decline by 9.2 per cent to ₹79 per kg, while PNG prices can ease by 9.3 per cent to ₹49 per kg. Similarly, in Delhi, the prices of CNG can decline by 7.5 per cent to ₹73.59 per kg, whereas PNG can come down by 11.2 per cent to ₹47.59 per kg.
Crisil Ratings Director Naveen Vaidyanathan said: “APM prices declining to $6.5 per mBtu could mean a 9-11 per cent cut in CNG and PNG prices, assuming companies pass on the benefit to end-consumers.”
In contrast, as per the earlier APM regime, gas prices could have risen further to $10-11 per million British thermal units (mBtu) for the first half of FY24 from $8.57 per mBtu for the six months ended March 2023, necessitating a price increase, in turn, for city gas distributors to maintain profitability, he added.
ICICI Securities said that prima facie, the step would be beneficial for domestic gas consuming companies like Indraprastha Gas (IGL) and Mahanagar Gas (MGL) (80 per cent, 85 per cent volumes sourced from APM, respectively), while Gujarat Gas (GGL) would benefit up to a limit (around 25 per cent of volumes largely sourced from APM).
“With APM prices now benchmarked to crude oil, it would ensure sustained competitiveness of CNG and residential PNG with alternative fuels such as petrol, diesel, and liquefied natural gas (LNG). The CNG discount over petrol and diesel, and residential PNG over LNG will increase to 25-40 per cent under the new regime from 20-35 per cent currently,” Crisil Ratings Associate Director Joanne Gonsalves said.
This can accelerate and sustain adoption of city gas and support distributors that have planned capex of around ₹90,000 crore over the next 4-5 fiscals, Gonsalves added.
Upstream firms could face some pressure
On the upstream front, ICICI Securities said “A revision in gas prices would reduce both ONGC and Reliance Industries’ gas realisation when compared to the previous six months but is still remarkably higher than what they were earning historically. This pricing mechanism would provide stability to their realisations as well.”
With this pricing coming into effect, ICICI Securities expects sourcing costs to go down by at least ₹6 per standard cubic metre.
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